I'm curious to hear what various shops are targeting for general yield on cost ranges are across the spectrum of assets on their equity investments.
From my side, equity for multi development we're generally looking for a minimum 7.25-7.5% untrended YOC in primary/secondary markets to begin conversations and to see if there are realistic ways of cutting costs/streamlining operations to a higher YOC (there isn't but we try). Industrial a bit higher and more market specific.
Understanding there is immense nuance here between urban/suburban, primary - tertiary and so on, but in terms of loose broad brush strokes I'm interested in learning more about what people are looking to achieve across multi, industrial, hotels, retail etc.
NYC targeting high 6%.
what exit caps is your firm modeling?
Industrial class-b primary markets - mid 7%
Southeastern multi/mixed use development. We're getting term sheets at deals at an untrended 7 or right under (6.75-6.8ish) right now.
Getting JV equity w those numbers?
Yes, although not via our usual two big players. Flirting with lots of foreign money at the moment.
Equity is definitely harder to come by than debt though.
Big box logistics in UK is around 7.00% from what we develop
what does that sell for now?
Core plus stuff is around 5.50-6.00% cap (what I do so my best knowledge). Only seeing reversionary stuff for sale. Core is non existent right but would trade at 25-50 bps discount. Obviously London has its own premium as well. Waiting for the redemptions to force sales and get the market going a bit.
Developments are drying up and there will be a supply shortage in 25-26 because no one is starting anything right now and all the planning committees are buggered so land is crap. You could underwrite an exit in 26 at 5-5.25% but anyone expecting a 50+ bps compression in the next two years is going to get burned.
Interesting, I'm not seeing yocs that high just yet. Out of interest
With or without planning risk?
Golden triangle or further north? (Warrington Haydock, Doncaster etc)
Does your yoc include financing costs?
Does your yoc factor in growth on lease up?
Tbf we build slightly bespoke boxes, they’re generic boxes with little tweaks but that would factor into the YoC you’re using. I’ve always learned that 7% is healthy.
I would say we are around 6.8-7.00% YoC. We only acquire land with planning permission (got burned on an unallocated site) and do not use debt in our YoC calc. Most of our developments are golden triangle but we do all UK. All BTS so prelet before development
A 7.25-7.5% UNTRENDED yield on cost for multifamily development in today's environment? Good fucking luck lmao.
We've shelved development entirely except for existing pipeline and extreme outliers where the basis is crazy low. Our target is a 6.5% untrended on multifamily (we've done 6.25%) in secondary US growth markets (think Sunbelt). Much lower in Canada as its a totally different environment. But in today's environment with your capitalized financing costs essentially tripled, rent growth slowing, and construction costs having barely come down, I don't see how anyone is pencilling to those returns.
Certainly not saying those numbers are achievable, but it's where the numbers make sense to us to pursue. I.E. we're not actively deploying meaningful amounts of capital. I'm writing from a LP perspective.
We've achieved it selectively on BTR deals in tier 2 markets, naturally these deals don't remotely exist on any wrap, infill, urban, or primary locations and are 1 in a couple thousand to achieve. Vast majority that get sent our way are in the 6.2-6.8 range and don't pencil.
I tend to find that the groups that say they are underwriting to such high yield on cost are also usually underwriting top end of market rents and aggressive opex to get there (I've had many deals shown to me with OpEx underwritten as a couple thousand per unit less than anything they are actually achieving in their portfolio).
To reiterate, this is what we’re targeting to reasonably deploy LP dollars at. The general theme is these deals do not exist outside of exceptional outliers, where there has been an excess of LP dollars available to the GP. And due to the state of the current maket, these select few deals are extremely competitive from an LP perspective.
The above relating to deals getting done is with a +\- 5-6K per unit expenses excluding taxes, insurance and mgmt fees in tier 2 markets. You can UW 3% or 800-900 per unit in mgmt fees, insurance of 600-800 per unit, on a 2500-2700 gross rent on 2-4 BR units, taxes say 2-3K per unit. These are generally Midwest deals. Assuming land values of 20K per unit, cost to build around 250K per unit for hard and soft costs excluding financing cots and land. They’re incredibly few and far between. The prompt and my comment were to highlight what we’re looking to achieve for what I’d describe as reasonable risk adjusted returns that groups are targeting. Granted, I could’ve been more specific in my prompt.
We have flexible capital where I can deploy Pref from 11.5-13% fixed on existing and development deals. I can quote Pref all day long on a 6.5% YOC project at mid to high 70s leverage. But unless you’re raising friends and family money, that deal never gets built if you need true institutional LP capital.
The point of the prompt from the initial question was what type of your returns is your firm targeting, not what you're seeing in the market. Anyone can build multi to a 6-6.5% YOC, and the firms that are doing so today are most likely being disingenuous to their LPs, using some form of friends and family capital or syndicated equity in an attempt to capture their development fee,
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